Iran, Sanctions and Inflation as a Weapon of Mass Destruction

In a new paper, an economist reconceives a pillar of U.S. foreign policy as an indiscriminate weapon that works by harming not regimes but their people.

Iran, Sanctions and Inflation as a Weapon of Mass Destruction
Iranians shop for groceries in the Iran Mall in the western part of Tehran, on June 20, 2021. Morteza Nikoubazi, via Getty

Edited by Sam Thielman

IN 2010, HAROLD KOH, the State Department's legal adviser and a distinguished Yale law professor, justified the Obama administration's War on Terror by resting its lethal actions on two pillars of international humanitarian law.

The first, Koh said, was that U.S. strikes would uphold the "principle of distinction," that is, they would correspond to military objectives, as opposed to targeting civilians. Notice that's not the same as declaring civilians inviolate in war, only a promise not to design a military campaign to harm them. The second is that U.S. strikes would be "proportionate," a tricky concept subjective enough to be ripe for exploitation. Koh defined a proportionate strike as one that was not "excessive in relation to the concrete and direct military advantage anticipated."

Hard to parse as that might be, Koh did confer an active humanitarian obligation upon a "proportionate" strike. Such a strike cannot "be expected to cause incidental loss of civilian life, injury to civilians, damage to civilian objects, or a combination thereof." Adherence to such criteria is what makes a strike "not excessive" and, hence, proportionate. Rejection of them, Koh's analysis suggested, gets into war-crimes territory.

As it happens, around the same time, Koh's colleagues in the State and Treasury departments were crafting an economic response to Iran's nuclear program. Building upon restrictions that began in 2006, it became known by the lurid shorthand "Crippling Sanctions," and the enthusiasm for it was even greater on Capitol Hill than in Hillary Rodham Clinton's State Department. Crippling Sanctions had something for everyone in elite foreign policy circles. For conservatives, it had an implied bloodlust, the crippling of a hated foe—leading, perhaps, to the toppling of one. For liberals, the crippling would be accomplished without firing a shot, yet would be so pulverizing as to compel Iranian diplomats to negotiate away the weaponizable aspects of their nuclear program.

Just who would be crippled, however, remained on the level of abstraction. The ostensible "targets" of the sanctions were supposed to be the Iranian security services and their industrial adjuncts or assets. That has been enough for policymakers, legislators and journalists to accept the sanctions' legitimacy. And the sanctions' potency as a point of leverage was frankly proven by the 2015 Joint Comprehensive Plan of Action that traded sanctions relief for verifiable roadblocks in pathways to a nuclear weapon. Politicians and their appointees tend to mumble through what, exactly, makes these sanctions so potent, if they acknowledge it at all.

A research paper released today by the economist Esfandyar Batmanghelidj makes the quiet part loud. The sanctions, which were multilateral and carried the blessing of the United Nations Security Council, resulted in Iran's first economic contraction in two decades. While the Stuxnet worm ate at Iran's nuclear industrial controls, the sanctions’ "weaponized inflation," Batmanghelidj writes, ate at economic fundamentals, resulting in very unequal but nevertheless widespread "human misery."

Those two words, weaponized inflation, speak to a less euphemistic and more accurate way for us to understand what sanctions are, and how they operate, through the prism of their impact on people. They come at an opportune moment: the beginning of an American reappraisal of the sanctions regimes that the U.S. increasingly imposes. Batmanghelidj seeks to prompt "reconsider[ation of] whether inflation – particularly when the goal is to induce maximal levels of inflation in the target country – is an acceptable intended impact of sanctions given disproportionate harms inflicted on civilian populations."

In so writing, Batmanghelidj highlights precisely why the bipartisan U.S. foreign policy and banking apparatus considers sanctions an alternative to war, rather than part of war's continuum. Sanctions are not the targeted weapons they might seem. Much as focusing on the "targets" of surveillance obscures the vast quantities of people whose communications are "incidentally" compromised, national sanctions do not operate like Koh's "discriminate" or "proportionate" weapons, but more like the economic equivalent of a weapon of mass destruction.

Batmanghelidj, looking at the context under which the Obama team crafted the Iran sanctions—the alarm at the nuclear program, the military quagmires of Iraq and Afghanistan—asks whether "using sanctions represents a commitment to diplomacy or a way to wage war by other means." It's an urgent question given where we are in the casual and profligate U.S. use of sanctions. Consider, say, the indifference with which the Biden administration cripples Afghanistan's economy and endangers millions. To recognize that sanctions are war by other means is to recognize that economic weapons make the equivalent of war crimes scalable.

ONE THING I DIDN'T KNOW about the Iran sanctions, but probably should have guessed, is the way they specifically spare Iran's economic elites. Here Batmanghelidj is relying on an account by an Iran sanctions architect, Richard Nephew, though the emphasis is mine:

In Nephew’s retelling, the U.S. tweaked the sanctions program to sustain Iran’s dependence on imports at a time when the country’s currency was experiencing a sharp devaluation. Sanctions were not imposed on food or medicine imports. But they were also not imposed on luxury goods—suggesting altruism wasn’t the sole basis for exemptions. “With Iran’s population technically able to purchase such goods and imports still flowing in, but with the exchange rate depriving most people of the practical benefit of being able to purchase these goods, only the wealthy or those in positions of power could take advantage of Iran’s continued connectedness,” explains Nephew. This strategy took advantage of inelastic demand—the poor would continue to need food and medicine while the rich would continue to yearn for luxuries. Every dollar or euro spent on luxury goods served to increase the cost of imported food or medicine. “Hard currency streamed out of the country while luxuries streamed in, and stories began to emerge from Iran of intensified income inequality and inflation.” In this way, the Obama administration sought to exacerbate inequality and inflation in order to “to drive up the pressure on the Iranian government from internal sources.”

So the people able to influence the Iranian nuclear program the least suffered the greatest amount of immiseration—all justified on the theory that the subsequent social and economic effects of exposing working-class and impoverished Iranians to greater levels of starvation and illness will prompt the Iranian government to Change Its Behavior. In 2012, the price of chicken tripled. Qassem Soleimani, who was personally under Treasury Department sanctions, was not among those who went hungry.

Of course, when the Iranian government did what the sanctions were predicated upon doing— negotiating controls on its nuclear program—the Trump administration voided the deal anyway and bolstered the sanctions, meaning that, for a substantial swath of the U.S. right and a contingent of some Democrats, the sanctions' goal is to topple the regime. "Advocates and analysts of sanctions policy have proven far more willing to conjecture about what sanctions may achieve than to assess whether sanctions have achieved much at all," Batmanghelidj observes.

But there's no shortage of data about what sanctions actually, definitely do. "Although policymakers can claim that sanctions will interfere with the economic operations of targeted actors, providing a means to coerce those actors to change their behavior, these claims are necessarily an exercise in speculation," Batmanghelidj writes. "What policymakers can be certain of, however, is that broad financial sanctions create inflationary pressures." He observes that Nephew claims that the sharp increase in the price of chicken was "not planned"—even though thinking about inflation for 10 seconds will lead to the conclusion that food prices are going to rise. Batmanghelidj interprets that odd claim as testifying "perhaps [to] an uncomfortable fact for Nephew to admit."

Between the end of the Iran-Iraq war in 1988 and the 2012 sanctions, Iran's economy grew, however unevenly. Then came the U.S. weaponization of inflation. "Price increases compounded the diminished economic prospects of ordinary households, which faced wage stagnation and worsening unemployment," he writes, describing effects that most Americans can identify with intuitively. "Individuals who once enjoyed the prospect of stable, salaried employment are increasingly making do with part-time or contract-based work. The tenuous nature of jobs means that households remain vulnerable to sudden changes in their economic fortunes." A few months into the pandemic, I reported, with the help of Batmanghelidj, on how the Trump "Maximum Pressure" sanctions were making COVID-19 vastly more damaging for the Iranian people.

Poverty has doubled in rural Iran since 2010 and increased by 60 percent in urban Iran. A step up from poverty is widespread working-class precarity. In that respect, America has made Iran more like America. No one quite weaponized inflation like Paul Volcker.

SANCTIONS ON IRAN WEREN'T ALWAYS like this, Batmanghelidj writes. He traces a history, one that starts in 1992 with the Iran-Iraq Arms Nonproliferation Act, whereby U.S. sanctions expanded from "narrow" prohibitions, which affected elements engaging in weapons proliferation, to the broader weaponized inflation of today. "Over the last decade," he says, "Iran has been the test case for developing a new kind of sanctions program, one that would draw much of its power from the use of financial sanctions."

The claim of novelty struck me as curious. I asked Batmanghelidj how he understood the 60-year old Cuba embargo in the context of his critique of sanctions as an inflation weapon. Admittedly, the Cuba embargo is unilateral, and the recipient of 29 years of formal international opprobrium, while the pre-JCPOA Iran sanctions are multilateral. But outside of that it seemed like Cuba is a forerunner of the Iran sanctions.

Here's how Batmanghelidj replied, in full:

The United States has maintained an embargo on Cuba for nearly 60 years, imposing unilateral trade and financial sanctions. Among U.S. sanctions programs, the Cuba sanctions program is unusual because of the strong international opposition to the embargo. Last year, the U.N. General Assembly called for the embargo to be lifted. The European Union is Cuba’s second largest trading partner after China. For this reason, U.S. administrations have not been as aggressive in enforcement of Cuba sanctions and have limited the expansion of so-called secondary sanctions that would impinge on the trade with Cuba by third countries (although the Trump administration took steps in the opposite direction). Still, U.S. sanctions exacerbate the economic consequences of Cuba’s import dependence by impacting foreign exchange liquidity and contributing to higher costs for essential goods. One 1995 review of the impact of U.S. sanctions on public health points directly to the impact of the U.S. embargo on critical supply chains: 'Unavailability of supplies and raw materials from U.S. subsidiaries greatly increases the costs of production of essential goods in Cuba. Overall, it is estimated that the embargo creates a ‘tax’ of 30% on all imports, which must be purchased from markets that are smaller and more distant than the United States.' These vulnerabilities, unchanged in the 27 years since that article was written, have left Cuba exposed to inflationary pressures which can cause food and medicine prices to rise, causing hardship for ordinary Cubans. In 2020, U.S. sanctions on Venezuelan oil exports led to fuel shortages in Cuba, which in turn led to lower agricultural output as farmers struggled to afford the diesel to run their tractors. Despite the exemptions covering food and medicine within the Cuba sanctions program, researchers involved in Cuba’s efforts to develop a COVID-19 vaccine have pointed to sanctions as a unique challenge they had to overcome. Cuban medical experts trying to procure ingredients and equipment to scale-up vaccine production faced inflated prices because of the impact of U.S. sanctions.

"IT WOULD BE UNREALISTIC to suggest that sanctions ought not cause inflation," Batmanghelidj writes. That's another way of "calling for the abolition of financial sanctions," and he's not going there with this paper. He has some wonky suggestions for mitigation—applying an "inflation brake"—that I'm not qualified to evaluate. But Batmanghelidj's paper is at times ambivalent about reducing the impact of an inflation weapon.

"[T]he level of inflation caused by a sanctions program is akin to the explosive yield of a bomb," he writes. "It may be possible for advocates of a more humane, efficacious approach to sanctions to demand that sanctions programs are designed to ensure the level of inflation in a targeted country remains below a certain threshold. Of course, governments have a hard enough time managing inflation in their own countries, let alone those on which they are waging a financial war." To say nothing of the fact that a smaller bomb or a guided missile is still a bomb or a missile.

Batmanghelidj asks: "If sanctions are not serving to change the behavior of the targeted regime, is the generalized economic pain of ordinary citizens in that country a justifiable unintended outcome?" The second part is the right question for sure. But would it justify "the generalized economic pain of ordinary citizens" if sanctions did change the behavior of the targeted regime? After all, you can argue that the sanctions compelled the Iranian government to change its behavior by negotiating the 2015 JCPOA. To my mind, the fact of the accord can't justify holding innocent Iranians hostage. The violation of the accord by the United States under Trump only makes the economic besiegement more risible.

Sanctions are increasingly a U.S. tool of first resort, something we're seeing with the current crisis with Russia over Ukraine, far outpacing any scrutiny of who they harm by working as directed. The acceptance of sanctions as an alternative to war is one of the psychological consequences of their proliferation.

Another consequence is justification. Here's a troubling tweet from Rep. Elissa Slotkin, a former CIA analyst, senior Pentagon official and one of the Democrats' emerging voices on "national security":

It is in this manner that people in power reconcile themselves to targeting populations for vengeance over acts those populations never chose and for which they are not responsible. It is in this manner that maintaining a global empire funnels policymakers into choices between sanctioning an adversary and invading them. And it is in this manner that people in power consider such a choice humane, because one option doesn't involve bombing.

Assaulting civilian populations is both more efficient with an inflation weapon than with a bomb—that scalability factor—and will attract vastly less opprobrium. Increasingly, this is the American way of war.

PROMOTIONS TIME. On Thursday, Jan. 27, at 7pm ET, I'll be in a virtual conversation with Wajahat Ali, author of Go Back To Where You Came From, moderated by WAMU's Jenn White and sponsored by the historic Sixth & I Synagogue in Washington DC. The next morning, Jan. 28, at 9am ET, I'll be part of a virtual panel from Middlebury College's Rohatyn Center for Global Affairs on the legacies of 9/11. Both are open to the public if you're not tired of hearing me talk about REIGN OF TERROR yet.